Accounting changes plumped up insurers' capital ratios

Life insurers, whose capital buffers shrank during 2008's downturn, emerged from 2009 with a rebound in capital. The reasons? Regulatory changes and a climbing equities market, according to Moody's Investors Service. Indeed, most carriers reported improvements in their regulatory and risk-based capital ratios, which is the amount of capital insurers hold relative to their investment risks and operations. The median risked-based capital ratio came in at 429% for 2009, according to Moody's. That's up from 394% in 2008. Typically, regulators will intercede if an insurer's risk-based capital ratio falls below 200%. Gains in operating income — which hit $41 billion in 2009, compared with a loss of $9 billion in 2008 — helped bolster capital and surplus levels, which were up 13% from 2008's levels. Still, regulatory changes were behind a good deal of the improvement. For starters, regulators began using a new method to evaluate the residential-mortgage-backed securities held by carriers. The rejiggering allowed insurance companies to post less capital against the bundled mortgages. Another change in statutory-accounting rules allowed carriers to apply deferred tax assets toward more of their statutory surplus. Moody's estimates that this change helped boost risk-based capital ratios by 10 to 15 percentage points last year. Carriers' holdings of commercial real estate and bundled residential mortgages continue to be a worry for Moody's, as the ratings agency noted that investment losses in those assets could still erode insurers' capital levels. The ratings company expects the investment losses to emerge over the space of several years, however, which would allow insurers' operating earnings to soften the blow.